After two years of lobbying, letter-writing, phone calls and visiting congressional representatives on ag trade issues, the efforts of farm and commodity organizations paid off in mid-January.
The long-awaited Phase 1 trade agreement between the U.S. and China was signed Jan. 15, and the next day the U.S.-Mexico-Canada Agreement passed the U.S. Senate and was sent to President Donald Trump to sign into law. The U.S. also signed a new trade agreement recently with Japan.
“These agreements are great news,” says Iowa Secretary of Agriculture Mike Naig. “Iowa’s top four trading partners for ag products are Canada, Mexico, Japan and China. Now we need to see real purchases, by China in particular. I believe those purchases will come.”
Is the U.S. done with trade negotiations? “No, not for the longer term,” Naig says. “We need to get a full-trade agreement with Japan to finish what we’ve accomplished so far. With China, we need to negotiate a Phase 2 agreement. And USMCA needs to be fully implemented. Overall, we need to start playing offense on agricultural trade. Let’s get a deal with the United Kingdom. Let’s address the challenges with Europe. Let’s expand our markets in Southeast Asia. We must continue to grow our exports.”
Renewed optimism on exports
With low prices and production costs rising, profit margins remain tight for crop and livestock producers in 2020. Securing trade agreements with four of our largest trading partners gives farmers greater market access for their products and a renewed sense of optimism heading into the 2020 growing season.
“The U.S.-Mexico-Canada agreement is important and will hopefully help boost our beef exports to improve cattle prices,” says Brian Tuttle, a cattle producer at Granville in northwest Iowa. Young farmers, he and wife Rachel are expanding their family farming operation by adding a slatted barn to custom feed cattle. “If we lose these export markets,” he notes, “we lose money, and that would dampen further expansion and slow the growth of the cattle industry in the upper Midwest.”
The USMCA has already been approved by Mexico, leaving Canada as the last country yet to ratify the agreement. Along with the U.S.-China deal, these agreements are fueling farmers’ hope that our trade relations could be stabilizing.
Iowa farmers—especially soybean, pork and beef producers—could be big winners if China follows through on its pledge to buy an additional $32 billion in U.S. farm products over the next two years. That spending would be on top of about $19 billion, the amount China spent for U.S. ag products in 2017, the year before the U.S.-China trade war began.
In the newly signed U.S.-China Phase 1 agreement, China says it will spend $12.5 billion more this year and $19.5 billion next year, pushing its total farm product purchases to $32 billion in 2020 and $39 billion in 2021.
Tariffs on U.S. ag products remain
The huge purchases promised by China would be 24% to 50% more than the $25.9 billion record set in 2012, which will be hard to achieve unless China buys a lot of ag products, says Iowa State University ag economist Chad Hart.
Also, an additional consideration is that China has agreed to make these purchases even though most of the tariffs it has levied against U.S. farm products are expected to remain in place.
“Until the retaliatory tariffs are gone, it will be difficult to see a huge increase in U.S. ag exports to China,” says Trent Thiele, Iowa Pork Producers Association president.
Many questions remain about the recent deal signed by Trump and Chinese officials. China says it will buy nearly $78 billion in U.S. manufactured goods over two years, $52 billion in U.S. energy products, and $38 billion in business, financial and insurance services. All totaled that’s $200 billion.
China has lost half of its pig population to African swine fever. China will be buying more meat, particularly pork, says ISU economist Dermot Hayes. China has already lowered its tariff on pork (prior to the Phase 1 deal), which he interprets as a sign China is going to become a reliable importer of pork. China will also likely buy more beef, poultry, milk and eggs as a result of that nation’s rising pork prices.
If soybeans continue to make up two-thirds of China’s ag-related purchases as they did before the trade war, China would be buying every soybean the U.S. exports as part of its promised additional $32 billion in farm purchases. But China also now has much less demand for soybeans to produce protein meal for livestock feed, as African swine fever has cut China’s hog herd in half.
China is trying to rebuild its hog herd and soybeans will likely be part of its purchases, says Hayes. To meet its purchase pledge, China would need to begin to reduce its tariffs on U.S. farm products, says Michael Dolch, director of public affairs for the Iowa Soybean Association. The U.S. plans to maintain tariffs on $370 billion of Chinese goods; China has tariffs on more than $110 billion worth of U.S. goods.
Hart expects China will buy more soybeans, but “there is uncertainty because China’s needs have changed. It’s a combination of tariffs and African swine fever involved here. China has to decide what it needs and try to line that up with what it’s required to do as a part of the U.S.-China trade deal.”
Another consideration: What if the U.S. again becomes a major supplier of pork to China? U.S. hog producers could then be using more soybeans. China would have less need to fully rebuild its hog herd. That would be a boon for Iowa, the largest U.S. pork producing state and second-largest soybean grower.
But there’s fear among some farmers and analysts that even if China starts buying more beans, the U.S. may never regain its market share in China. Brazil and Argentina have been filling the gap created by the absence of U.S. soybean shipments to China as a result of the trade war.
China could walk away again
Also, what happens after this two-year agreement with China ends? Will there be a Chinese market for U.S. soybeans and pork products? China could walk away again.
Dairy farmers could see opportunity in both the U.S.-China deal and the USMCA trade agreement. Former U.S. Secretary of Ag Tom Vilsack, now president of the U.S. Dairy Export Council, says it’s tough to put a number on how much more business there will be.
“Once it’s fully implemented, USMCA will take several years for the tariff quotas to be increased, but once the agreement is fully implemented, the expectation is somewhere between $200 million and $300 million of additional business opportunity for dairy products, which is important,” he says.
Vilsack is skeptical that China will follow through on every term of the U.S.-China trade pact. “The Chinese are famous for promising, and not so famous for delivering. It’s important in this agreement to be sure the U.S. monitors China’s performance on a regular basis.” He says it may take several months to determine if both sides are following the terms of the new agreement.
Taking the next step
Iowa farmer Kevin Ross, president of the National Corn Growers Association, attended the White House ceremony of the signing of the Phase 1 trade deal between the U.S. and China. “Signing the Phase 1 agreement is a step in the right direction to resolving the trade dispute with China and restoring the trading relationship between the two countries,” he says. “China holds tremendous opportunity for U.S. corn, ethanol and DDGs. As more specifics become available NCGA will closely monitor implementation to ensure the commitments are upheld and that U.S. corn farmers resume trading with Chinese customers. We urge the administration to quickly begin Phase 2 negotiations